HDFC twins drive Nifty rally after MSCI index rule change

The Nifty50 ended 1.7 percent higher in trade on Friday and half of the gains seen on the benchmark index were driven by the HDFC twins. Shares of HDFC Bank rallied over six percent hitting a seven-month high and along with HDFC Ltd, which also saw a similar rally trading around Rs 1,611 per share, contributed 150 points to the overall 320-point Nifty rally.

The rally on Friday occurred after IIFL Alternative Research said that the merger increases the probability of HDFC Bank's inclusion in the MSCI India Index after the changes in M&A rules for the MSCI Index.

According to reports, MSCI no longer requires a minimum foreign room. MSCI is a global provider of equity, fixed income, real estate indexes, and multi-asset portfolio analysis tools.

So now the changes have been made in methodology documents in respect of M&As. The previous rules indicated that HDFC would have to exit the index following its merger with HDFC Bank and automatic entry of HDFC Bank in the index; the new rules imply that HDFC Bank's fully diluted equity, after issuing shares to HDFC shareholders, will be considered after the merger.

The HDFC and HDFC Bank boards of directors approved a merger of equals on April 4, 2022, subject to appropriate regulatory approvals. It's likely to go into effect in between 15 and 18 months. Every HDFC shareholder will get 42 shares of HDFC Bank for every 25 shares held.

The merged entity of HDFC-HDFC Bank when included in the index can command an MSCI Weight of 13 percent, up from 5.78 percent, , according to a Macquarie report.

It’s also noteworthy that the banking stock has outperformed the NIFTY Index in a calendar year for the first time in two years.

When compared to the S&P BSE Benchmark index, the stock which has seen 8.06 percent increase over the past month, HDFC Bank shares have increased by over 15 percent. From its 52-week low reached on June 17, 2022, it has recovered 25 percent.